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Is Oakwood looking to sell, merge? CEO denies rumors about talks

Talk is circulating that four-hospital Oakwood Healthcare Inc. is up for sale and in talks with other health systems about a possible sale or merger.

Sources close to the talks say the Dearborn-based nonprofit system is being courted by Dallas-based Tenet Healthcare Corp., owner of the Detroit Medical Center, and Beaumont Health System.

"I have had continual discussions with every health care system leader throughout the state of Michigan," said CEO Brian Connolly, adding that the discussions did not include merger or acquisition. "There are no talks with Tenet or DMC."

Over the past several weeks, Crain's has spoken with multiple sources — including physicians on Oakwood's medical staff and competing hospital executives — about merger talks in Southeast Michigan. Navigating the changes wrought by health care reform is among the drivers for these conversations, they said. And four sources who asked to remain unnamed in this story said they have inside knowledge about Oakwood and a sale or merger.

Beaumont CEO Gene Michalski acknowledged his Royal Oak-based three-hospital system has begun discussions with several hospital systems about a closer relationship. He would not confirm names or the type of business arrangement.

"Because of changes in implementation of the Affordable Care Act, we continue to update our strategic plan," said Michalski in a statement to Crain's.

"As part this planning, we have been talking with other health care organizations that are also preparing (for) and adapting to health reform. These are confidential discussions, so we can't provide names. If and when we decide to align with another organization, we'll certainly let you know."

Last May, Beaumont and Detroit-based Henry Ford Health System ended seven months of merger talks that would have created Southeast Michigan's largest health system with 10 hospitals and $6.4 billion in revenue.

High on the list of problems the two systems faced were physician culture incompatibility. The majority of Beaumont's doctors are fiercely independent while most Henry Ford physicians have practiced medicine in an employed group corporate model for many years.

In a possible Oakwood deal, physician morale could be a factor, among several others, one source said.

Physician concerns

Physician relationships at Oakwood could be improved through a merger, one source said; a merger with Tenet, for example, could bring in management expertise to address some lingering problems.

Case in point: Some surgeons are upset with some of Oakwood's personnel changes for medical support services, the source said. Some physicians are also concerned about staffing levels on medical floors, the emergency department and intensive care units, the source said.

But Connolly said there are no unresolved physician issues. He said with 1,300 physicians on Oakwood's medical staffs there are always discussions to improve physician relations.

Like many health systems, Oakwood has been active the past several years in working with employed and medical staff physicians to form various departments and management support groups.

For example, two years ago Oakwood consolidated its three physician organizations into a single division and medical group called Oakwood Physicians Integrated. Last year, it created a post-acute care division and realigned its acute care business to more effectively coordinate care when patients leave its hospitals.

Which partner?

A source told Crain's that physicians aren't as much concerned about the nonprofit or for-profit ownership of Oakwood or other hospitals.

"The relationship between the hospital and doctor remains pretty much the same," the source said.

"I think of greater concern to the physicians is the belief that patients will suffer as the number of independent physicians continues to shrink because hospital systems are acquiring more independent physician practices."

Another source said Oakwood and Tenet are taking their time and making sure their plan helps physicians not only affiliated with Oakwood but also DMC.

"They don't want to make the same mistake as Beaumont and Henry Ford," the source said.

The bottom line

While Oakwood's financials have been in the black since 2008, when the system lost $76 million, net income has steadily declined the past three years from $64.1 million in 2009.

Net income, which includes investment and patient operations income, dropped slightly to $50.1 million in 2010 and even more so in 2011 to $16.8 million.

In 2012, net income rebounded to $39.6 million. However, Oakwood received a $29 million payment from the federal government for settling a residency program funding dispute. Without that payment, Oakwood's net income would have dropped three straight years.

But Connolly said 2013 was a good financial year for Oakwood. He said the four-hospital system hit all its financial targets last year, and its net income exceeded 2012's $39.6 million.

Oakwood's bond rating last year also was reaffirmed at A2 by Moody's with a stable outlook. Oakwood was also a finalist for the 2011 Malcolm Baldrige National Quality Award. Henry Ford won in the health care category that year.

National trend

Like many systems adjusting to health care reform, Oakwood has been both focusing on internal quality and operational improvements and the possibility of expanding with potential partners, sources say.

Last fall, said one source, the Oakwood board authorized management to seek a merger partner. Connolly denied the board took such action.

"They concluded they couldn't go it alone anymore. They needed to partner with someone," said the source.

Another source told Crain's that Tenet has been talking with Oakwood the past eight months, which places the timing shortly after Tenet approached Nashville-based Vanguard Health Systems Inc. for a sale that included DMC.

Tenet, which acquired DMC on Oct. 1 after 2 ½ years under Vanguard, operates 77 hospitals in 14 states. Tenet also owns Conifer Health Solutions, a revenue management improvement company based in Frisco, Texas, with more than 700 hospital clients.

Tenet's chief spokesman, Steven Campanini, vice president of corporate communications, declined to comment on Oakwood or any other hospital in Southeast Michigan.

"We have corporate policy to not discuss corporate development activity," Campanini said in a statement to Crain's.

Like many investor-owned chains, the Affordable Care Act with its private insurance and Medicaid expansion has spurred Tenet into a growth splurge the past two years.

Tenet is in negotiations to acquire several hospitals in Connecticut, including Bristol Hospital, Waterbury Hospital and two-hospital Eastern Connecticut Health Network. The sales await various state approvals.